• While Telefónica and Liberty said to be on same page on O2–Virgin Media integration, respective chiefs hinted at varying concerns and strategic priorities linked to the progress of the JV.

Fries and Álvarez Pallete: two minds on UK JV

Fries and Álvarez Pallete: two minds on UK JV

Source: Virgin Media

Both Telefónica Group Executive Chairman José‑María Álvarez‑Pallete and Liberty Global’s Chief Executive Mike Fries were interviewed as part of the Goldman Sachs Communacopia Virtual Conference last week. Speaking on different days, both leaders provided an insight into the progress of the proposed combination of their respective UK businesses Telefónica UK (O2) and Virgin Media. While there was an emphasis on the partners working well together, some differences in attitude and strategy emerged that reflect the personalities of the pair.

Álvarez‑Pallete cautious on merger process, Fries driving the deal

José‑María Álvarez‑Pallete

José‑María Álvarez‑Pallete

Source: Telefónica

During their interviews, both company heads discussed the ongoing review of the proposed deal by the competition authorities. Álvarez‑Pallete was frank on the uncertainty surrounding the jurisdiction for the proposed merger, while remaining cautiously optimistic that the deal itself should not cause concern. The uncertainty is founded on the no‑man’s land position the UK currently sits in as it untangles itself from European Union membership. Álvarez‑Pallete acknowledged that because of this, it is “not clear for us if this is going to be decided in the European Union or in the UK because Brexit is in the middle.

Earlier in summer 2020, there were signs that a power struggle was underway between the UK’s Competition and Markets Authority (CMA) and the European Commission (EC) as to who should be making a decision on the deal (Telefónicawatch, #144). Existing EU rules point to a Commission decision, as do the terms of the UK’s Withdrawal Agreement (although the apparent value of this may be up for debate). The Telefónica Chairman said that the parties are keeping the CMA in the loop, and was seemingly reluctant to rule out the prospect that it could be the ultimate decision-maker.

Fries, in contrast, appeared more confident that the deal would be a European matter, and Liberty’s considerable experience steering its way through EC merger investigations has left him relaxed about the likely outcome. He downplayed the issues arising in relation to the deal as “pretty regular stuff” and described the European authorities as “very positive” about the case. Fries also said that the two asset owners were monitoring relations between European and UK bodies and keeping the CMA and Ofcom “up to speed”, but that notification to the EC was the only option. He was strident in saying that that is the process”.

Telefónica envisages network relationships, Liberty reluctant to plan ahead

Both executives highlighted that the financing of the deal has now been completed, and that ‘day one’ preparations are well‑advanced — considering there is only so much that can be done prior to formal clearance. An area that will likely continue to attract attention between now and final approval is the prospect of continued expansion of the combined venture’s fixed infrastructure, and whether that will be fuelled by partnerships and wholesaling with other players in the market.

Here, Álvarez‑Pallete appeared the more forthright, predicting the JV will become an accelerator for convergence trends in the UK and for the rollout of more next‑generation infrastructure.

Mike Fries

Mike Fries

Source: Liberty Global

He claimed “Liberty already had the plan to accelerate [rollout] but now it’s going to be accelerated”, and raised the prospect of creating a wholesale market that could be an alternative to the growing fibre network of Openreach. The Telefónica chief suggested that this will prompt stakeholders in the UK market to make choices as to whether they will rely on indirect access, or develop their own networks to scale (it might be worth noting that Telefónica has picked the indirect access path in Germany).

Fries, meanwhile, suggested that this was a discussion for a later date, and appeared to imply it was best not to say anything that might spook the powers‑that‑be ahead of receiving clearance for the merger. Asked about wholesaling, or the prospect of partnership with other major retail players in the UK, Fries did not want to rule anything out, but was careful not to explicitly rule anything in.

“I’ll say two things to be careful. One, all options are open. But two, we have to be thoughtful… our focus right now is obviously on the regulatory process. So it would be very difficult for us in the midst of a binding transaction that’s under regulatory review to go ahead and do something else significant or strategic that could alter or impact the transaction and the regulatory process. So clearly, we’re not going to do that and nor should we do that.”

— Fries.

He did acknowledge, though, that Liberty had had preliminary conversations with Telefónica on the prospect of network expansion, and recognised that increased investment alongside industry or financial partners with wholesale access provisions “could be very accretive and very interesting”.

For now, however, Liberty is expected to remain “laser‑focused” on completing the merger.

Fries has also a bit of history in making a type of ‘non‑denial denials’ of benefits linked to the O2–Virgin Media deal that are there, but best not discussed in polite company. In a summer discussion as part of a Merrill Lynch technology conference, the Liberty chief alluded to the significant potential for the application of tax‑saving historic losses at the new JV, while also distancing himself from any suggestion that these considerations were a significant part of corporate decision‑making.